The U.S. Environmental Protection Agency (“EPA”) has recently proposed a new rule and the U.S. Congress has recently enacted a new law affecting the global renewable fuel industry.
First, EPA announced its proposed changes to the Renewable Fuel Standard (“RFS”) program through its “Set 2 Rule”.1 This proposed rule seeks to promote the growth of domestic feedstock and renewable fuel production by increasing volume obligations for 2026 and 2027 while curbing the use of foreign-made feedstocks and fuel. EPA is currently taking comments on the proposed Set 2 Rule through August 8, 2025.
Second, on July 4, 2025, the President of the United States signed into law the “One Big Beautiful Bill Act” (the “Act”). The Act made sweeping changes to the rules under the Internal Revenue Code of 1986, as amended (the “Code”), relating to energy tax credits, including the Clean Fuel Production Tax Credit (“Section 45Z Tax Credit”) under Section 45Z of the Code.
This Client Alert summarizes key proposed changes to the RFS program and to the Section 45Z Tax Credit.
EPA’s Proposed Set 2 Rule Seeks to Expand Renewable Fuel Volumes While Disfavoring Foreign Feedstock and Fuel
On June 17, 2025, EPA proposed the Set 2 Rule. This proposal reflects the Trump Administration’s efforts to protect and grow domestic renewable fuel production while disfavoring foreign feedstocks and fuel.
First, EPA intends to continue expanding the renewable fuel volume requirements for 2026 and 2027 at a rate similar to the 2023–2025 rule—leading to the highest volume requirements in the history of the RFS program.2 As shown below, EPA has taken a particular interest in increasing biomass-based diesel production, which EPA states will provide support for domestic soybean farmers and feedstock producers.
More importantly, though, EPA proposes reducing the number of Renewable Identification Numbers (“RINs”) generated for imported renewable fuel and domestic renewable fuel produced from foreign feedstocks by half. As such, domestic renewable feedstocks and fuels are intended to outpace foreign sources in RIN generation, incentivizing businesses to end their reliance on foreign feedstocks and production facilities. To support this change, EPA has asserted a need to decrease America’s reliance on imports, promote American production, support rural agricultural sectors, and increase American energy security.
To implement and enforce this change, EPA also proposes that domestic renewable fuel producers will be required to keep records of feedstock purchases and transfers (e.g., bills of sale or delivery receipts) and report each feedstock’s point of origin (i.e., foreign or domestic) as part of their renewable fuel batch reports. These requirements are added as EPA expresses concern that bad actors may try to claim foreign feedstock as domestic to gain a financial benefit. EPA states that these new recordkeeping and reporting requirements are “minimally onerous” given the RFS program’s current recordkeeping obligations. EPA is also adding requirements for attest engagement auditors and QAP providers to verify that feedstock point of origin was correctly reported.
Finally, EPA proposes to reduce the equivalence value for renewable diesel from 1.7 to 1.6 to account for the non-renewable portion of the fuel. Likewise, EPA proposes an equivalence value of 1.6 for jet fuel, which previously had been determined on a facility-by-facility basis.
Comments on the proposed Set 2 Rule are due by August 8, 2025.
Changes to Section 45Z Clean Fuel Production Tax Credit
The Act includes changes to the eligibility for and the calculation of the amount of the Section 45Z Tax Credit. The Act also includes new foreign entities of concern restrictions, which largely uphold the prior Senate version of the Act. Below is a summary of key changes in the Act as they relate to the Section 45Z Tax Credit.
Section 45Z of the Code provides for a production tax credit for each gallon of sustainable aviation fuel (“SAF”) and non-SAF clean transportation fuels produced at a qualified facility and sold to an unrelated buyer. The producer must be registered as a clean fuel producer.
The credit amount is calculated by multiplying the applicable amount per gallon of qualifying fuel by the “emissions factor” for SAF or non-SAF transportation fuel. Prior to the Act and for fuel produced through December 31, 2025, the applicable amount was 35 cents per gallon for SAF and 20 cents per gallon for non-SAF clean transportation fuel. The applicable amount was increased to $1.00 per gallon and $1.75 per gallon, respectively, if certain “prevailing wage and apprenticeship” requirements are satisfied. In order to qualify for the Section 45Z Tax Credit, transportation fuel and SAF cannot have an emissions rate greater than 50 kilograms of CO2e per mmBTU. The statute authorizes the Secretary of the Treasury to publish annual emissions rate requirements the fuel must meet to qualify for the credit and to issue guidance for implementation of Section 45Z.
The Act eliminates the “special rate” of the credit currently available for SAF (i.e., up to $1.75 per gallon) by capping the value of the credit at $1 per gallon for all eligible fuels, including SAF. This change would limit the Section 45Z Tax Credit available with respect to SAF produced after December 31, 2025.
The Section 45Z Tax Credit was scheduled to expire at the end of 2027 under the Inflation Reduction Act of 2022. The Act extends the Section 45Z Credit through 2029. Although this extension is down from 2031 proposed in the earlier House and Senate versions of the Act, it still provides certainty for renewable fuel project developers and investors for the next four years.
The Act also changes how lifecycle greenhouse gas emissions are calculated for purposes of the Section 45Z Tax Credit. Specifically, the Act excludes any emissions associated with indirect land use change. Effective January 1, 2026, the proposal would increase the value of the credit for renewable fuels produced from crop-based feedstocks such as corn ethanol and canola biodiesel. Furthermore, under the Act, for transportation fuels derived from animal manure—such as dairy manure, swine manure, and poultry manure—a distinct emissions rate would be provided with respect to each of the specific feedstocks used to produce eligible fuel.
The Act imposes certain limits on the use of foreign feedstocks. The Act modifies Section 45Z to prevent the use of certain foreign feedstocks outside of North America (i.e., United States, Mexico, and Canada), such as used cooking oil from China. This is consistent with the prior House version of the Act. The prior Senate version would have allowed the use of feedstocks outside the United States but would reduce the credit amount by 20% effective January 1, 2026.
The Act includes new foreign entity of concern provisions applicable to many energy tax credits, including the Section 45Z Tax Credit. In general, these rules restrict various energy tax credits by prohibiting them from being claimed by taxpayers or projects that engage in certain activities with, or otherwise have, significant relationships to “prohibited foreign entities.” There are two sets of restrictions applicable to energy tax credits: Under the first set of restrictions, no Section 45Z Tax Credit would be allowed if a renewable fuel project is owned by a “specified foreign entity” or a “foreign-influenced entity” (as defined in proposed Section 7701(a)(51) of the Code). Under the second set of restrictions, no Section 45Z Tax Credit would be allowed if the project received “material assistance” from a prohibited foreign entity (i.e., a specified foreign entity or a foreign-influenced entity); however, restrictions based on “material assistance” are not applicable to the Section 45Z Tax Credit.
The Inflation Reduction Act of 2022 added Section 6418 to the Code, which allows eligible taxpayers to transfer all or portion of their eligible credits (including the Section 45Z Tax Credit) for cash to an unrelated taxpayer. The prior House version proposed repealing the tax credit transferability, including for the Section 45Z Tax Credit attributable to SAF or non-SAF clean transportation fuel produced after December 31, 2027. The Act retains the tax credit transferability provision under Section 6418 but prohibits transfers of any portion of eligible tax credits to specified foreign entities.
Outlook
With the U.S. Congress’s and the Trump Administration’s focus on domestic renewable fuel, companies should consider the financial impact of overseas operations. Fuel producers should also be prepared for new reporting requirements to ensure their RFS eligibility and to obtain the benefits of the Section 45Z Tax credit.
Many thanks to Summer Associates Charlotte Ramirez and Parker Jacobs for their contributions to this client alert.
190 Fed. R. 25784 (June 17, 2025).
2The proposed Set 2 Rule sets volume requirements for only two years (as opposed to the Set 1 Rule’s three years). This change reduces planning certainty for the renewable fuel industry but might obviate the need for EPA to make future adjustments to these set volumes.
